Thermo Fisher Tops Earnings, Cuts View on Currency Woes

Thermo Fisher Scientific, Inc. (TMO) reported its third-quarter 2014 financial results, accounting for the inclusion of Life Technologies and excluding divestures related to the acquisition.

Adjusted earnings per share (EPS) in the reported quarter came in at $1.71. Earnings remained 2 cents ahead of the Zacks Consensus Estimate and surpassed the year-ago adjusted EPS number by a formidable 31.5%. On a reported basis, third-quarter EPS of $1.17 showed a year-over-year improvement of 36% largely due to an improved top line and margin.

Thermo Fisher Scientific Inc - Earnings Surprise | FindTheBest

Revenues increased 30.7% year over year to $4.17 billion during the quarter but missed the Zacks Consensus estimate of $4.23 billion. The year-over-year increase was owing to 4% organic growth and 27% increase in revenues due to acquisition (net of divestitures). Currency translation had a negligible impact on revenues.

With the acquisition of Life Technologies, Thermo Fisher currently operates in four business segments viz. Life Sciences Solutions Segment, Analytical Instruments Segment, Specialty Diagnostics Segment, and Laboratory Products and Services Segment.

The four aforementioned segments recorded third-quarter revenues of $1.07 billion (540.7% annualized growth), $786 million (up 2.7%), $812 million (up 7%) and $1.63 billion (up 2%), respectively.The stupendous growth in the Life Sciences Solutions Segment was due to the inclusion of the Life Technologies acquisition for the entire quarter.

Gross margin of 49.0% during the third quarter was up 503 basis points (bps) year over year. In addition, Thermo Fisher witnessed a 50.1% increase in adjusted operating income to $892.6 million. Adjusted operating margin came in at 21.4%, an expansion of a huge 277 bps year over year.

The company exited the quarter with cash and cash equivalents and short-term investment of $543.6 million compared with $5.83 billion at the end of 2013. Year-to-date operating cash flow for the quarter was $1.66 billion versus the year-ago figure of $1.28 billion.

Guidance

Taking into consideration the unfavorable change in foreign currency exchange rates, Thermo Fisher reduced its fiscal 2014 revenue guidance to the range of $16.74 to $16.82 billion (annualized growth of 28%) from the earlier range of $16.86 to $16.98 billion (annualized growth of 29% to 30% from 2013). The Zacks Consensus Estimate of $16.93 billion remains outside the guided range.

The company now expects to report adjusted EPS for the year in the band of $6.87 to $6.95 (implying annualized growth of 27% to 28%), narrower than the earlier announced range of $6.85 to $6.97 (26% to 29%). The Zacks Consensus Estimate of $6.92 remains within the guidance range.

Our Recommendation

With another full quarter of operation post the Life Technologies acquisition, Thermo Fisher posted a mixed third-quarter 2014 with adjusted earnings per share ahead of the Zacks Consensus Estimate while revenues lagged the same. However, both the top and the bottom line sailed past the year-ago numbers.

According to the company, the Life Technologies integration is on track and has led to the emergence of an unrivaled market leader serving research, Specialty Diagnostics and applied markets. As per management at Thermo Fisher, the acquisition supports its three-pronged growth strategy of technological innovation, a unique customer value proposition and expansion in emerging markets.

Thermo Fisher expects this acquisition to help expand its commercial infrastructure and global presence. The company is currently working on the growth opportunities in Asia Pacific and emerging markets. Given the huge potential in the region and the high growth rate in China, Thermo Fisher is likely to exceed its goal of garnering 25% revenues from the high-growth Asia-Pacific region and emerging markets by 2016.

The company also launched several new products. It introduced Vanquish UHPLC system and columns in applied markets for customers who need to analyze high volumes of samples. The company also showcased its expanded offering for customers in clinical laboratories, including allergy and autoimmunity tests, a range of immunosuppressant assays, the new Prelude MD HPLC, Endura MD mass spectrometer and ClinQuan MD software for clinical use. Thermo Fisher is focusing on its strategy to expand the markets for next-generation sequencing technologies with the launch of Ion PGM Dx system and reagents for clinical use in the U.S. and Europe.

However, currency headwind continues to pose a major setback, which is reflected in the company’s guidance cut for 2014.

Thermo Fisher currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the medical instrument sector that warrant a look are Edwards Lifesciences Corp. (EW), Cepheid (CPHD) and Alphatec Holdings, Inc. (ATEC), all carrying a Zacks Rank #2 (Buy).

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